As a Landlord, it is important to take proper precautions to protect yourself in case you were ever to be sued. The most common forms of asset protection come from either umbrella coverage or using a business structure (most commonly an LLC). This is an important part of planning when you have rental property but unfortunately is often overlooked. Let’s take a closer look at both to understand the merits of both and how they may be able to help you.
Basics of Umbrella Policy
As the name implies umbrella insurance is a sort of catch-all that provides additional protection for the “What Ifs” that works to protect you when you reach the limits of other insurance policies like homeowners or auto. Imagine you are sued for $1 million for an accident at your rental property and your insurance coverage only goes up to $250,000. You personally would be on the hook for the remaining $750,000 ($1 million settlement – $250,000 insurance coverage). An umbrella policy however would step in and cover this additional $750,000 assuming you have enough umbrella coverage.
The great thing is that with an umbrella policy you are protected whether something happens to you personally (i.e. auto accident) as well if something happens at your rental properties. An LLC only really provide protection if something happens at the rental property. Umbrella provides great benefits for a relatively low cost. The downside is that if the claim exceeds your umbrella policy you are on the hook for the excess amount. Taking the same example from earlier, the settlement is $1 million and there is $250 insurance coverage and additionally $500,000 in umbrella. In this example you are still responsible for $250,000 ($1 million settlement – $500,000 umbrella – $250,000 insurance coverage).
Basics of an LLC
A Limited Liability Company (LLC) is designed to provide asset protection in case you were to get sued. Essentially, in a lawsuit, if something happens at a rental property any potential losses are limited to the property in the LLC. Assume the home is worth $500,000 and is the only property in the LLC. What this does is effectively separate your assets limiting the potential loss to the home worth $500,000.
An LLC helps shelter you from larger lawsuits and can provide more protection than umbrella coverage because an LLC does not have a limit, where with umbrella coverage our personal assets can be at stake for any amount above the limit. For this increased protection there are more costs. Establishing an LLC can be expensive in some states (currently $800 a year in CA) and requires more paperwork and hoops to jump through.
What is best for me?
This question is best answered by your financial planner and attorney. There are some things to consider like the number of rental properties you have and their location. If you own a single property nearby it may be easiest to just use umbrella coverage. However, if you own multiple properties, or properties in other states than an LLC or combination of LLC and umbrella coverage may be best. Remember most people choose one or the other, but you can have both forms of coverage.
FAQs
If you're still debating between the two, here's some good news: In every state, you can have both umbrella insurance and an LLC. So if you want to double your coverage, it actually is possible. Talk about a win-win!
Does umbrella policy cover rental properties? ›
For rental insurance, umbrella policies cover multiple rental properties instead of specific properties. It's possible, for example, to take out a property-specific landlord insurance policy.
What is the best business type for rental properties? ›
Short- and long-term rentals are best held by an LLC to reduce personal liability without paying double in taxes.
What are the disadvantages of an LLC for a property? ›
Using a real estate LLC can come with disadvantages such as tax complexity, setup challenges, transferred tax obligations, lack of guaranteed asset protection, financing difficulties, and increasing expenses.
Can an LLC be an umbrella company? ›
The answer is yes--it is possible and permissible to operate multiple businesses under one umbrella LLC.
What is not covered by a business umbrella policy? ›
It does not cover damage to our own property or any liability related to your business or profession. The umbrella also typically does not cover exposures that the underlying policies also do not cover.
Can you write off umbrella insurance for rental property? ›
If you're a landlord who owns multiple properties and you use some of this as personal property, then an insurance company will allow you to take out a personal umbrella policy. And in that case, the premiums associated with that policy can often be deducted — or at least partially deducted.
Does umbrella insurance cover tenant lawsuits? ›
If you're a renter and have renters insurance, an umbrella policy can extend your liability protection beyond the limits of your primary policy. If you're a landlord, this coverage can help protect you from lawsuits by tenants, their guests, or other third parties.
Do you need umbrella insurance for Airbnb? ›
A blanket umbrella policy provides coverage for rental properties in multiple cities or states, making it a good option for landlords/investors with multiple Airbnbs. Note that if you operate your Airbnbs under a commercial property license, you will need a business or commercial umbrella policy.
What type of rental properties make the most money? ›
High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces.
For some real estate investments, it is highly recommended to use an LLC and an S corporation at the same time, with the LLC holding the property and the S corporation managing the business. This strategy shall offer real estate investors both the asset protection of an LLC and tax benefits from an S corporation.
What is the disadvantage of owning a rental property? ›
The drawbacks of having rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood's appeal to decline.
Can a umbrella policy be a business expense? ›
Generally speaking, the IRS will allow you to deduct commercial umbrella insurance if it's purchased to protect business income.
How does umbrella insurance work for business? ›
Commercial umbrella insurance provides an extra layer of liability protection by covering costs that go beyond your other liability coverage limits. In other words, commercial umbrella insurance complements your other liability coverages by taking over when your other liability coverage limits have been reached.
Are you personally protected with an LLC? ›
LLCs are generally valued as a business structure in that they protect the personal assets of members. If you are sued or face creditor claims, only the assets of the LLC itself can be subject to a judgment lien, with few and extraordinary exceptions. The same is true if the business fails.
Who needs an umbrella liability policy? ›
But if you have a lot of assets or a high chance of being sued, you might want an umbrella policy. It might be worth buying umbrella insurance coverage if you: Own property. Have significant savings or other assets.
